The recent rally in European markets appears to have finally run out of steam this week as investors start to take profits over concerns that the macro economic backdrop is much weaker than was thought to be the case, and that whatever the outcome of a US, China trade deal, it won’t be enough to mitigate a broader economic slowdown, with this week’s OECD downgrades also sharpening investor concerns.
The narrative around this case has been reinforced by some rather disappointing China trade numbers for February which saw exports decline by over 20% and imports decline by 5.7%, both missing expectations by a large margin, in the process pushing markets in Asia even further into negative territory and the Nikkei225 to its worst weekly performance since December, and has seen markets here in Europe open sharply lower.
Despite the disappointment over the Chinese trade numbers it should be remembered they will have been hugely skewed by the Lunar New Year holiday with most of the country closed for several days, which means the numbers must be looked at in that context. On a more optimistic note, the latest GDP numbers from Japan came in slightly ahead of expectations at 0.5%.
This morning’s German factory orders numbers for January, which saw another heavy decline this time by 2.6%, help to reinforce yesterday’s surprise decision by the ECB to pre-commit to further stimulus measures later this year with the introduction of another TLTRO, which is due to start in September. On the flip side of the ledger, industrial production numbers for France were better than expected.
The upshot of the new TLTRO announcement was to see financial stocks in Europe fall heavily yesterday as falling yields and flattening yield curves raised further concerns about their ability to improve their profit margins.
This may well also help explain this morning’s reports that Deutsche Bank is reported to be intensifying merger talks with Commerzbank. While some may see this as a necessary step to helping support the German banking sector, we already know from bitter experience that merging two struggling banks has the potential to be a recipe for disaster. From too big to fail, to too big to bail, as the economy in Europe continues to struggle, and margins continue to shrink.
In November last year the European Central Bank was saying that only a serious economic shock would prompt the implementation of new stimulus measures, and that the slowdown was likely to be temporary.
Yesterday the ECB had to throw in the towel on the assessment of a temporary slowdown as they announced the prospect of a new 2 year TLTRO program, scheduled to start six months from now in September, while extending its low rate guidance until the end of 2019, which on the face of it seems rather conservative, but was probably an attempt to temper a market reaction that they are more worried than they are letting on.
The actions of the ECB suggest that they have little confidence in any sort of recovery in economic activity in the upcoming months, and as such, given the comments in November it would appear that the ECB thinks the euro area is in the grip of a significant economic shock, sending the euro to its lowest levels since 2017.
The European Central Bank isn’t the only central bank concerned about the economic outlook, this week the Bank of Canada and Reserve Bank of Australia also issued rather dovish updates, and even the Federal Reserve appears to be getting cold feet about further tightening measures after New York Fed President John Williams announced that US policymakers were prepared to exercise patience in a “new normal” of slower growth.
Today’s US payrolls numbers could well feed into that weaker narrative, or complicate it depending on your viewpoint. In January we saw a big uptick in payrolls growth to 304k, though a lot of these gains were as a result of part time job gains in the wake of the US government shutdown. The December number was revised down from 312k to 222k, so there is a good chance we could see a similar revision lower today in the January number.
For February markets are expecting a more modest 180k, in line with an ADP print of 183k, however it is on the wages front that could prompt further US dollar gains this week. After a modest decline to 3.2% in January wages are expected to edge back up to 3.3%, where they were in December and the highest level this decade, while the unemployment rate is expected to slip below 4% to 3.9%.
Canada’s February payrolls data could well also reinforce the dovish tilt from the Bank of Canada earlier this week, with a weak jobs number expected of 0.6k, as well as a modest slowdown in wages growth to 1.7%.
On the companies front, troubled retailer Debenhams is once again expected to be in the spotlight on reports that Mike Ashley, CEO of Sports Direct is looking to seize control of the ailing business and run it himself, while stepping down as CEO of Sports Direct. Debenhams issued another profits warning earlier this week and has another £50m rent payment due this month. Whatever the outcome from the latest developments it is becoming clearer that some form of denouement is coming, with Mr Ashley reported to be looking to integrate it with House of Fraser.
The pound appears to be impervious to the increasing political deadlock between Brussels and London and ahead of next week’s parliamentary votes. No deal continues to be the default option with markets increasingly expecting MPs to pass new legislation revoking what would be the automatic process of the UK leaving the EU on the 29th March. That’s a big expectation and not one I would place a huge bet on given the already sizeable big divisions amongst MPs.
US markets look set for another ugly session on the back of todays’ weaker Asia and European leads, and look set to post their worst weekly performance since early December.
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